Question: Shea Savings negotiates a fixed - for - floating swap with a reputable firm in South America that has an exceptional credit rating. Shea is

Shea Savings negotiates a fixed

-

for

-

floating swap with a reputable firm in South America that has an exceptional credit rating. Shea is very confident that there will not be a default on inflow payments because of the very low credit risk of the South American firm. Do you agree? Explain.

.

In reality, there is a tendency that South American firms are overrated, so the risk that the South American firm will not meet its payment obligations is higher than it seems.

Yes. If the credit risk is low, there is no reason that can prevent Shea Savings from receiving payments from the South American firm.

.

While the credit risk of the South American firm is low, the sovereign risk may be high, since the government could possibly restrict the firm from sending payments.

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